A while ago I noticed something that many investors overlook: understanding what deflating means can completely change how you view your investments during periods of high inflation. Especially after what we experienced in 2022, when central banks aggressively raised interest rates to curb the soaring inflation in Europe and the United States.

Look, most people only see nominal numbers. If your salary goes up 5%, you think you've improved. But if inflation is at 7%, you've actually lost purchasing power. That's where the concept of deflating comes in. Basically, deflating means adjusting those numbers to eliminate the effect of inflation and see the real economic picture.

In economics, analysts use deflators to compare data over time without inflation distorting the picture. For example, if a country produced 10 million in goods in Year 1 and 12 million in Year 2, you might think it grew 20%. But if prices increased 10% during that period, the real growth was only 10%. That’s what the deflator does: it shows you the truth behind the numbers.

Now, in Spain and other European countries, a serious debate has started about deflating the IRPF. This means adjusting tax brackets so that when you get a nominal raise, you don’t end up paying more taxes just because of inflation. Basically, it’s a way for taxpayers not to lose purchasing power due to progressive taxes. In the US, France, and Nordic countries, they already do this annually. In Germany, every two years. But in Spain, at the national level, it hasn't been done since 2008 when the original article was written.

Proponents say it’s fair: if your salary increases but only because of inflation, why should you pay more taxes? Critics argue it reduces government revenue and benefits higher earners more because IRPF is progressive. Also, they say maintaining purchasing power could further boost demand and prices.

As an investor, this matters to me because deflating the IRPF would mean more money available in people's hands. More available money generally means more capital seeking investments. Historically, during periods of high inflation and high interest rates, certain assets perform better than others.

Gold, for example, has always been a refuge. When money loses value, gold tends to hold or increase its value because it’s not tied to any specific economy. In 2022, we saw how this worked.

With stocks, it’s more complicated. High inflation and high rates generally pressure the market. But here’s the interesting part: not all companies suffer equally. Energy companies boomed in 2022 while tech stocks plummeted. If you have liquidity and a long-term horizon, dips are opportunities.

Forex is another game. When inflation is high, currencies depreciate. This can create opportunities, but the currency market is brutally volatile, especially with leverage. It’s not for beginners.

Diversification remains key. Commodities, selective stocks, government bonds, maybe some forex if you know what you’re doing. Each behaves differently depending on the economic cycle.

In the end, deflating the IRPF could have positive effects on investment demand, but economists agree that the actual benefits for an average person aren’t as spectacular as they sound. We’re talking about saving a few hundred euros a year. It’s not transformative. The important thing is to understand that deflating, whether in taxes or in economic data analysis, is simply a tool to see reality without the noise of inflation. And in investing, seeing clearly is everything.